- Prelims: Indian Economy(Fiscal Policy, GST, Article 265,
- Mains GS Paper III: Fiscal policy, GST Council, Cooperative Federalism etc
ARTICLE HIGHLIGHTS
- In the recent rulings, in ITO vs Vikram Sujitkumar Bhatia: The question before the Court concerned whether an amendment to a provision of the Income Tax Act, 1961, could have retrospective effect in the absence of legislative mandate.
INSIGHTS ON THE ISSUE
Context
Direct and Indirect Taxes in India:
Income Tax Act 1961:
- It is an act to levy, administrate, collect & recover Income-tax in India.
- It came into force from 1st April 1962.
- The Income-tax Act, 1961 is the charging Statute of Income Tax in India.
- The Government of India brought a draft statute called the “Direct Taxes Code” intended to replace the Income Tax Act,1961 and the Wealth Tax Act, 1957.
- The Income-tax Act has provided separate provisions with respect to levy of tax on income received in advance as well as the income with respect of which the amount has not yet been received.
- A person also has to keep track of his TDS deducted while calculating his final tax liability at the end of the year.
- However, the bill was later scrapped because of the wealth tax act being repealed.
India’s law of taxation is built on two central precepts.:
- On the idea captured in Article 265: tax may be imposed only with the authority of law.
- On a principle of sureness, that any levy ought to be clear, consistent, and predictable.
- Both precepts emanate out of a larger commitment to the rule of law, in particular to values of legality and certainty.
Cases of Supreme Court enacting into existence taxes that lack legislative support:
ITO vs Vikram Sujitkumar Bhatia:
- Issue: Whether an amendment to a provision of the Income Tax Act, 1961, could have retrospective effect in the absence of legislative mandate.
What Section 153C of the Act says?
- It stipulates the conditions under which a search made on a person’s premises could result in the opening of proceedings against other persons and entities.
- Before an amendment(2015): Section 153C allowed the Revenue to proceed against third parties to a search, if material seized (such as money, bullion, jewelry, or books of accounts) “belongs or belong to” a person other than the one who was subject to the search.
Amendment in 2015:
- Section 153C: It stipulated that assessments could be made against third parties to a search.
- Even if the material seized — in the case of documents and books of accounts — “pertains or pertains to” the person or if information contained in those items “relates” to the person.
- The amendment was not made expressly retrospective.
Ruling of different High Courts:
- For incriminating material found during a search to serve as a basis for assessing persons alien to the search, that material must not merely relate to, or pertain to, such person but must “belong” to them.
- A mere reference to a person’s name would not by itself satisfy the law.
- There must be evidence that the material in question is the person’s property.
Gujarat High Court:
- Application would impinge on rights that had vested on persons through the previous stipulation.
- If a law was merely procedural in nature, it would apply retrospectively only if it did not take away any substantive rights conferred on a person.
- Court found that the amendment was bringing into the fold of Section 153C a new class of assessees, who were previously excluded.
Reasons why Supreme Court reversed this verdict:
- The old Section 153C had been replaced by amendment.
- The words “belongs or belong to” had been substituted by “pertains or pertain to.
- One must presume that the unamended provision never existed in law, not even before the date of the amendment.
- The new law is declaratory, in that it seeks to explain an earlier provision, and is hence retrospective.
Court should act as maker, not interpreter:
- Section 153C may have been amended through substitution.
- The phrase “belongs to” continues to remain in the provision.
- It added an additional stipulation: That even material — in the case of books of accounts and documents — that “pertains or pertain to” a person can serve as a ground for fresh proceedings.
- The amendment by no means seeks to expand the law’s domain with an eye to the future.
- It will apply to past searches, has acted not as an interpreter of the law but as a maker of the law.
- Union of India vs Ashish Agarwal:
- The Court resuscitated notices of reassessment that had been issued by the Revenue without any sanction of law.
- It not only reversed the Allahabad High Court’s judgment that had been carried to it on appeal.
- It has verdicts rendered by at least seven different High Courts that were not before it.
Issues and High court’s stand:
- Parliament had enacted a new regime to govern reassessments of completed income-tax proceedings.
- Despite the change in law, the Revenue continued to issue notices under a repealed provision.
- It derives authority from executive notifications that extended timelines during the COVID-19-inflicted period.
- The High Courts declared these notices invalid, but also pointed out that the Income-Tax Department, if it so desired, was at liberty to invoke the new law, if the statute of limitation so permitted.
- Quashing these notices would have some effect on the revenue.
- There have been cases where limitation had expired, leaving the authorities with no choice but to drop any proposal for reassessment.
Way Forward
- The Court seems to be encroaching on legislative functions along with striving to give life to what were otherwise entirely illegitimate actions.
- The Court also invoked its power under Article 142: It allows it to pass orders for “doing complete justice to a cause”.
- This power ought not to be applied in breach of statutory law.
- In this case, Court not only resuscitated actions that lacked any legislative support but also reversed judgments that were simply not on appeal before it.
- Article 265 forbids taxation without legislation.
- Courts should not diverge into the legislative zone.
QUESTION FOR PRACTICE
Explain the rationale behind Goods and Services Tax(Compensation to states)act of 2017.How has COVID-19 impacted the GST compensation fund and created new federal tensions?(UPSC 2020) (200 WORDS, 10 MARKS)
